02207cam a22002777 4500001000700000003000500007005001700012008004100029100002100070245013600091260006600227490004200293500001800335520100900353530006101362538007201423538003601495690008801531690006601619700002201685700002801707710004201735830007701777856003801854856003701892w18727NBER20170818013332.0170818s2013 mau||||fs|||| 000 0 eng d1 aAcemoglu, Daron.10aSystemic Risk and Stability in Financial Networksh[electronic resource] /cDaron Acemoglu, Asuman Ozdaglar, Alireza Tahbaz-Salehi. aCambridge, Mass.bNational Bureau of Economic Researchc2013.1 aNBER working paper seriesvno. w18727 aJanuary 2013.3 aWe provide a framework for studying the relationship between the financial network architecture and the likelihood of systemic failures due to contagion of counterparty risk. We show that financial contagion exhibits a form of phase transition as interbank connections increase: as long as the magnitude and the number of negative shocks affecting financial institutions are sufficiently small, more "complete" interbank claims enhance the stability of the system. However, beyond a certain point, such interconnections start to serve as a mechanism for propagation of shocks and lead to a more fragile financial system. We also show that, under natural contracting assumptions, financial networks that emerge in equilibrium may be socially inefficient due to the presence of a network externality: even though banks take the effects of their lending, risk-taking and failure on their immediate creditors into account, they do not internalize the consequences of their actions on the rest of the network. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aD85 - Network Formation and Analysis: Theory2Journal of Economic Literature class. 7aG01 - Financial Crises2Journal of Economic Literature class.1 aOzdaglar, Asuman.1 aTahbaz-Salehi, Alireza.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w18727.4 uhttp://www.nber.org/papers/w1872741uhttp://dx.doi.org/10.3386/w18727